Apple’s surprise sales warning earlier this month, which cited weak China demand and the uncertainty surrounding trade talks between Washington and Beijing, has rippled through U.S. corporate earnings this week, highlight the bottom line impact of conflict between the world’s two biggest economies.
Apple Inc.’s (AAPL) surprise sales warning earlier this month, which cited weak China demand and the uncertainty surrounding trade talks between Washington and Beijing, has rippled through U.S. corporate earnings this week, highlight the bottom line impact of conflict between the world’s two biggest economies.
Caterpillar (CAT) shares slumped to the bottom of the Dow Jones Industrial Average Monday after the industrial equipment maker posted its biggest quarterly earnings miss in a decade and said 2019 profits would like fall short of analysts’s forecasts thanks to slowing demand in China. Chipmaker Nvidia (NVDA) , which gets around 56% of its revenues from China, said fewer sales forced it to trim its current-quarter outlook, sending its shares down more than 17%.
“I think Caterpillar was surprised at how weak China was,” TheStreet‘s founder, Jim Cramer said Monday. “Caterpillar shows you what happens in a world-wide slowdown, and that very few companies are immune. It’s quite jarring.”
Nvidia shares were marked 14.4% lower in the opening hours of trading at $137.02 each, while U.S. listed chipmakers followed suit, with Advanced Micro Devices (AMD) slumping 6.66% to $20.47 each. Applied Materials (AMT) was also hit, falling 1.7% to $38.51.
Caterpillar shares were marked 9.6% lower at $123.7 each, a move that would trim the stock’s three-month gain to around 10% and value the Peoria, Ill.-based Dow component at around $73 billion.
The moves pushed the Dow Jones Industrial Average 390 points lower by mid-morning trade, while the Nasdaq Composite was marked 124 points to the downside at 7,059.58 points.
- Action Alerts Plus: A Check on the Market, Tech and Media
- TheStreet: Earnings Preview: Apple, AMD, Verizon, Other Giants to Report Crucial Q4
- Real Money: Dissecting Nvidia’s Sales Warning: Tech Check Blog
The twin references kicked-started the busiest week of the fourth quarter earnings season, which sees around 125 S&P 500 companies updating investors will bottom-line profits and near-term outlooks.
At present, analysts are expecting overall S&P 500 profits to rise 14.3% from the same three-month period last year, but also calculate that pace will slow to around 2% this quarter before rising to 4.5% in the three months ending in June.
China’s marked economic slowdown — as well as the roll-off of last year’s $1.5 trillion U.S. tax cuts — represents as a big portion of the pending weakness, given that Asia accounts for around 8.3% of all S&P 500 revenues, according to S&P Dow Jones Indices.
China’s economy grew 6.6% last year, the slowest since 1990, as domestic demand and export growth suffered as the government moved to crack down on crippling pollution with tighter rules on building and emissions and the ongoing trade war with the United States had a knock-on effect through global supply chains, many of which orginate from the world’s biggest exporter.
The International Monetary Fund cut its global economic growth forecast for the second time in three months following the China reading, citing concerns over unresolved trade conflicts between Washington, Brussels and Beijing and slowing activity in Europe.
Apple was the first U.S. bluechip to cite weaker China demand when the world’s biggest tech company told investors on January 2 that revenue for the three months ending in December would come in around $84 billion, notably shy of the Street consensus of around $94 billion and the company’s own previous guidance of between $89 billion and $93 billion.
“While we anticipated some challenges in key emerging markets, we did not foresee the magnitude of the economic deceleration, particularly in Greater China,” CEO Tim Cook said. “In fact, most of our revenue shortfall to our guidance, and over 100 percent of our year-over-year worldwide revenue decline, occurred in Greater China across iPhone, Mac and iPad.”
The Apple chief pinned the weaker iPhone demand in China on several factors, including a slowing economy worsened by “rising trade tensions with the United States.” Cook also cited high prices tied to the strength of the U.S. dollar, fewer carrier subsidies and customers taking advantage of reduced battery replacements in the softened demand for new iPhones.
Apple, which generates around 20% of its sales in China, will report its formal quarterly results after the close of trading Tuesday, with investors likely focused on revenue forecasts for the March quarter, which is now pegged at around $59.3 billion but could be guided lower following today’s market action.
Apple shares slipped 1.91% to $154.74 – almost level pegging to where stock was prior to its January 2 revenue warning.
Two other companies on this week’s earnings slate — Corning (CLW) and AMD, which earn 31% and 26% of their respective quarterly sales from China — could also find themselves impacted by the weaker projections from their larger rivals.
Microsoft (MSFT) , which reports Wednesday, counts on China for around 10% of its annual $110 billion in revenues, making the world’s second largest economy second only to the United States in terms of its important to the software and computing giant.
McDoanld’s (MCD) , which reports Wednesday as well, gets around a third of it revenues from what it calls “high growth” markets that includes China, where it has around 2,600 restaurants, its second biggest non-U.S. market behind Japan.